Karnataka Draft Law Proposes Exemption From Repaying Loans To Unregistered Micro Lenders

In a bid to protect the economically vulnerable sections and individuals, Karnataka government is proposing an ordinance that exempts borrowers from repaying loans taken from unlicenced and unregistered micro finance institutions.

The draft Karnataka Micro Finance (Prevention of Coercive Actions) Ordinance 2025 aims to give relief to borrowers from coercive action by MFIs, money lending agencies or organisations.

The move comes in the wake of a spate of suicides by borrowers, who had taken loans from unregistered MFIs.

The Karnataka legislative assembly and Karnataka legislative council are not in session. However, the proposal has been made as the governor is convinced that circumstances exist to make such a law necessary and expedient, the government said in a media release.  

The ordinance aims at relieving the economically vulnerable groups and individuals, especially farmers, women and women's self help groups from the undue hardship of usurious interest rates and coercive means of recovery by microfinance institutions, money lending agencies and other such organisations operating in Karnataka. 

All MFIs in Karnataka are required to apply for registration with the district registering authority within 30 days of the ordinance coming into effect.

The application should include details of their operating areas, interest rates, due diligence and recovery systems, authorised personnel for lending/recovery, and information on each borrower, such as loan amounts, repayments, and outstanding balances. They must also provide a written commitment to comply with the ordinance's provisions.

MFI, money lending agencies, or organisations will be prohibited from using coercive action to recover money from borrowers. Any such coercion will lead to legal punishment, and the registering authority has the power to suspend or cancel their registration under this ordinance, the proposal reads. 

The proposed ordinance suggests that MFIs should not be allowed to take security from a borrower, such as a pawn or pledge, for a loan. It also asks MFIs to ensure transparency in their loan pricing, which includes interest charges, processing charges, and insurance premiums.